TFSAs

The Tax Free Savings Account (TFSA) allows you to save money each year without paying any tax on the investment income (interest, capital gains or dividend income) you earn.

There are so many things you can save for by using a TFSA. It might be to renovate your home, buy a cottage, go on a vacation or save for your child's wedding or your retirement. It could even be just to have emergency funds readily available.

The Basics

To open a TFSA, you will need:

A valid Canadian Social Insurance Number
To be at least 18 years old
To be a Canadian resident

Key facts

Contribution Deadline	December 31 for that calendar year
Contribution Limit	$5,500 for 2018 The Canada Revenue Agency (CRA) will track your contribution room. CRA reports this amount to individuals through the 'My Account' function on the CRA website
Carry Forward	TFSA contribution room can be carried forward indefinitely to subsequent years
Eligibility	A valid Canadian Social Insurance Number To be a Canadian resident
Government benefits	Since TFSA withdrawals are not considered income for tax purposes, there is no impact on government benefits Your TFSA will not affect your eligibility to receive benefits such as the Guaranteed Income Supplement, Canada Child Tax Benefit or Old Age Security benefits, etc.
Minimum Age	18 years You cannot contribute retroactively for the years prior to 18 years of age.
Maximum Age	No maximum age
Spousal Contribution	Spouses (and common-law partners) can give each other money to contribute to their own TFSA as long as it is within the maximum allowed TFSA assets can be transferred to a spouse tax-free upon death
Overcontribution penalty	1% per month on overcontribution amounts (even if the contribution was withdrawn in the same tax year)
Tax Features	Account is funded with after-tax dollars Earnings growth is tax-sheltered Withdrawals from the account remain tax-free
Type of investments	Wide range of investments, including mutual funds and exchange-traded funds
Withdrawals	You can withdraw your savings tax-free at any time and for any purpose Any amount withdrawn from a TFSA is added to your contribution room for the following year and can be carried forward indefinitely to subsequent years

TFSA vs RRSP?

Which makes more sense? With both, your investment growth is tax-sheltered, but there are important differences:

Product feature	TFSAs	RRSPs
Annual contribution limit	$5,500 for 2018	For 2018, 18% of income or $26,230, whichever is lower (increased annually)
Tax-deductible contribution	No	Yes
Contribution carry-forward	Yes	Yes
Taxable consequences	No tax on growth and no tax on any withdrawals	Withholding tax applies if withdrawn prior to RRIF; the amount withdrawn is added to taxable income
Maximum age for contributions	No	Yes (71 years old)
Re-contribution of withdrawals	Yes (in subsequent calendar year)	No (except for Home Buyers’ Plan and Life Long Learning Plan)
Overcontribution penalty	Yes, 1% per month on over-contribution amounts (even if contribution was withdrawn subsequently in the same tax year)	Yes, 1% per month if you exceed the $2,000 lifetime over-contribution amount

Basically RRSPs save you taxes now and TFSAs save you taxes later.

	TFSA	RRSP
Pre-tax income	$1,000	$1,000
Income tax paid (at 40%)	$400	n/a
Amount invested	$600	$1,000
Value after 20 years (assuming 5.5% growth)	$1,751	$2,918
Tax due when the money is withdrawn (at 40%)	$0	$1,167
Cash in hand after 20 years	$1,751	$1,751

Source: AGF Investments Inc. For illustrative purposes only.

TFSA vs non-registered savings

In both accounts, contributions are made with after tax money. However, in a TFSA, any earned interest, capital gains or dividend income remains tax free – but in a non-registered account, any earned income incurs taxes each year.

Product Features	TFSAs	Cash Accounts
Annual contribution limit	$5,500 for 2018	No limits
Contribution carry-forward	Yes	N/A
Taxable consequences	No tax growth and no tax on withdrawals	Fully taxable earnings growth
Capital loss on Investment	Cannot claim	Can offset capital gains (three preceding tax years, carried forward indefinitely)
Re-contribution of withdrawals	Yes (in subsequent calendar year)	Yes
Overcontribution penalty	Yes, 1% per month on over-contribution amounts (even if contribution was withdrawn subsequently in same tax year)	N/A

Why bother with a TFSA – because tax-sheltered growth can add up

	TFSA	Non-registered savings
Initial investment	$5,000	$5,000
Value after 20 years (assuming 5.5% growth and after tax)	$14,589	$10,872
Tax savings	$3,717	N/A

Note: *Investment income earned in the TFSA is not subject to tax therefore the rate of return is 5.5% per year. Investment income earned in the non-registered account is subject to tax at a rate of 28% therefore the after-tax rate of return will be 4% per year (i.e., 5.5%x(1-28%)). The 28% investment tax rate is the weighted average tax rate on an investment portfolio comprised of 30% dividends, 15% capital gains and 40% interest (i.e., (30%+15%+40%)/3).

Source: AGF Investments Inc. For illustrative purposes only.

TFSA Withdrawals
- You can withdraw your savings tax-free at any time and for any purpose.
  
  Since TFSA withdrawals are not considered income for tax purposes, there is no impact on government benefits – and your TFSA will not affect your eligibility to receive benefits such as the Guaranteed Income Supplement or Old Age Security benefits.
  
  So if you’re saving for retirement, a TFSA can help manage your taxable income since withdrawals from an RRSP or RRIF are fully taxable.

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TFSAs

TFSAs

TFSAs

The Basics

Key facts

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Harmony Transfer Authorization for Registered Investments (TARI)

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